Investors pummeled Micron Technology, Inc. (NASDAQ:MU) at the start of the week. MU stock was down as much as 3.7% on Monday after a major analyst downgrade on the stock. However, you should completely ignore the panic and here’s why…
The analyst in question works for Nomura Securities International. He recently visited all the major semiconductor companies on the other side of the Pacific, including Micron. After those meetings, he decided to downgrade Micron from “Hold” to “Reduce.” (Source: “Micron: Nomura Says Sell in ‘Perfect Storm’ of Supply and Demand,” Barron’s, March 7, 2016.)
Most investors are blindly following the analyst’s recommendation. But remember that making a lot of money in the stock market means knowing when to move against the crowd. You have to know when to buck the trend and when to ride it.
The analyst, Romit Shah, gave a bunch of reasons for slashing his MU stock price target from $11.00 to $8.00, but his entire argument was built on one thing: his assumption that revenue from personal computing chips (DRAMs) will keep falling.
He said that profits won’t really matter in the short-term because everybody is too eager for market share. According to him, that is the major battleground for 2016.
“[There’s a] perfect storm in memory: DRAM demand is weak across all end markets, including PCs, mobile and servers,” writes Shah. “[And] supply growth is accelerating as Micron, Hynix and Samsung per our understanding have no intention of bringing down utilization.”
By that logic, you should be most bullish on whichever semiconductor company grows its market share the most. It’s the exact same kind of logic that drove all those mergers and acquisitions last year. But it’s also a really dumb way of looking at things.
Semiconductors are dead center in the technology space. If there’s anything we know for certain, it’s that technology will continue to evolve. The reduction in DRAM revenue is not just a problem of oversupply; it’s about the relationship between consumers and their devices.
Few people can afford to upgrade their desktop, laptop, tablet, and smartphone every two years. The product cycle is overbearing. Something has to give and it appears to be the PC market. Considering how many options we have for devices, it looks like a permanent shift.
So the metric we should be looking at is innovation. Which firm will have the next breakthrough in chip technology? Imagine if Micron develops a chip that’s 1,000 times faster than normal processing speeds. Would Apple or Samsung really say, “Okay that’s nice, but how much market share do you have?”
Of course not! That would be absurd. Corporate customers gravitate to the best technology, particularly when their sectors are highly competitive. And that’s why I’m bullish on Micron stock—it has been heavily investing in research.
The company spent a lofty $421 million on research and development last quarter. And a few months ago, Micron just happened to unveil a chip that could run 1,000 times faster than normal. From my vantage point, that makes MU stock a potentially attractive investment. I’ll take innovation over scale any day of the week. (Source: “First Quarter Fiscal 2016,” Micron Technology Investor Presentation, December 22, 2015.)
So while I think Shah is a bright guy, this isn’t the right time to turn bearish on Micron. I’d say it’s quite the opposite, in fact. This is the perfect moment to go bullish on Micron and take a closer look at the company, because MU stock is trading at a huge discount from its 52-week high.